Retirement is a significant change that can elicit wide ranging emotions. In building your new identity outside the workforce, it’s as important to deal with your emotional needs as it is to manage your financials. Unfortunately it’s not as simple as just waking up one day and making the decision to retire and start a ‘new’ life. It needs planning and we’ve found it’s often best done with your nearest and dearest.
You can expect some of the following emotions as you progress along your own path to retirement. There’s initial optimism at the new adventure that lies ahead, followed by the celebration on the day you actually do it. You’re entitled to enjoy some bottled up indulgence in the first stage of your ‘retirement honeymoon’. This might morph into a phase of disenchantment before you really begin rebuilding your identity, then comfortably settle into your new role.
Everyone experiences it differently, some make the change seamlessly, while others have to work through it more doggedly. However you manage it, there’s usually a period of deciding how you can feel useful with a satisfying purpose. Once you solve this, you can then escape the re-building phase and establish a rewarding daily routine for yourself that helps regain your sense of purpose.
There is also some financial issues to resolve. So as you begin on your retirement path, this six point checklist below may help you to manage your own retirement transition:
1. Am I ready to make the transition to retirement?
It’s an important question to ask before triggering retirement. Some like the structure of full-time employment, while others long for each day to be another weekend. Stopping paid employment doesn’t mean you must stop working all together – working part-time is popular with many as they transition to retirement.
Philanthropy or voluntarily giving your time to the community via volunteer work is also popular. While many are happy to fill their days with hobbies like golf, bridge or gardening, others enjoy the chance to spend more time with their grandchildren. No matter what you prefer, try to vividly visualise your retirement and ensure you’re ready for it. How you will spend your time so you have no regrets.
2. Funding your Retirement
Once you’re comfortable about retiring and/or a transitional path, next ensure your cash flow strategy can adequately fund your retirement. Retirees can access many different income sources and it’s important to check the suitability of each option for you. We’ll delve into these strategies in more detail at our Retirement Planning Seminar on May 29th – you can register at the bottom, but for now we’ve briefly summarised a few options:
After years of growing your superannuation savings during your working years, retirement is when super really comes into its own.
You can access your super once you reach ‘preservation age’ and retire – that’s now age 56 but will rise to age 60 over the coming years. Otherwise, you can access your super from age 65, even if you’ve not retired. You can draw on your super as lump sums or pension income tax free once you turn 60 but there are some great tax concessions between preservation age and 60.
By starting an income stream from your superannuation (account based pension) you can draw regular payments so that it can be much like receiving your regular wage or salary. This makes budgeting easier and you still enjoy superannuation’s tax concessional benefits, including tax-free payments once you turn 60.
If you don’t have enough savings to be self-sufficient, your retirement income may also include some kind of pension payment or allowance from the government. About 65% of older Australians rely on a government pension or allowance as their main source of personal income at retirement.
The government support you get depends on how much income you receive from other sources and the value of your assets. It’s unwise to spend unnecessarily just to maximise your Centrelink benefits, as this leaves you more at the whim of future government policy. Further cuts to social security may occur to counter our ever increasing social security government costs. So, keeping control of your financial situation is best.
An annuity is a financial product where you pay a lump sum for a guaranteed fixed annual income, usually with payments throughout the year. The term ‘annuity’ is usually associated with lifetime annuities but an annuity can also be a guaranteed income stream for a fixed term of 20 years or less, to even 5 years.
An annuity can be for a guaranteed base level of income. Say you’re a couple needing $60,000 p.a. in retirement and you expect to get $34,000 p.a. of Age Pension. You could use some of your money (super or otherwise) to buy an annuity that pays you a guaranteed income of $24,000 p.a. This combination might cover your basic living and any surplus funds could be used for extra discretionary expenditure.
The guaranteed income nature of annuities means their underlying portfolio investments rely heavily on interest bearing assets. Consequently, annuities generally offer a low return on the lump sum you exchange for them. Even so, some investors consider peace of mind is worth more than the potential for higher returns.
3. Pay off your debt
Entering retirement with debt is not generally beneficial and it can be downright dangerous. Once retired, most can’t afford to have a portion of their income eaten up by debt repayments. Interest on investment loans can be deductible but if most of your retirement savings are held in superannuation, you probably won’t be paying tax so deductibility of debt is pointless. The certainty of debt interest you’d avoid by having none is a normally good return on your money. So clearing all debts before retiring and staying away from credits cards whilst retired is usually sage advice.
Strange as it may sound, life insurance is not to insure your life, as no amount of money could do that. But life insurance can insure the financial loss or hardship your loved ones would experience if you died prematurely. Often, the primary loss being insured is loss of income. Once you’re retired, your income usually doesn’t rely on whether you walk this earth or not, so you may no longer need life insurance.
While you may no longer need insurance, a major threat to your retirement plans may be from your under-insured adult child. Unfortunately, even the best-laid retirement plan can be hijacked by a financial crisis due to the death or disability of your adult children. Amazingly, 95% of young families have insufficient cover (according to Lifewise/NATSEM’s Underinsurance Report). This enormous insurance gap is partly due to the considerable debt now borne by many young people. We’ve written more about this in Could family de-rail your retirement?
5. Estate Planning and Succession Planning
Estate planning concerns arrangements to most effectively deal with your personal assets after you pass away. People are often subconsciously reluctant to consider this sombre subject. But estate planning strategies should always be viewed as a worthwhile part of your ongoing financial management.
It’s critical to plan ahead for who will protect your assets, manage your affairs and act independently in your best interests when you are no longer able to do so. The lack of such a plan could create long lasting impact on your loves ones. Without an estate plan, your heirs could face large tax burdens and the courts could decide how your assets are divided, or even who gets your children. A key part of this before it’s too late, is deciding who’ll manage your estate to your wishes when you die.
An Estate Planning Lawyer working in liaison with your Financial Adviser and Accountant can ensure your Estate Plan effectively covers your full situation.
6. Seek Advice with your Partner
If you have a life partner, we strongly recommend you involve them in all your financial decisions. This will ensure a smoother journey to your agreed destination and also make it easier if one of you passes away or becomes incapacitated.
A good financial adviser can work with you for improved probability in achieving your goals. Within this process, your goals would be clarified, ensuring a comfortable ‘journey’ in arriving at your financial ‘destination’.
Done well, it will ensure you stay the course without panic that may cause you to flinch when the share market has a bad day (or even a bad year).
There are many aspects to consider as you approach retirement but you don’t need to worry if you cover the above checklist and seek professional help where appropriate.
After all, retirement is to be enjoyed and a bit of preparation should ensure peace of mind so you make the most of it.
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. You should not rely on it and seek personalised professional advice before making any decision.